In April 2005, Chrysalis Chairman and Managing Director David A. Jones, Jr. was appointed non-executive Chairman of Humana Inc. (NYSE: HUM), one of the nation's largest health benefits companies. A Humana board member since 1993, David had previously served as Vice Chairman since 1996.

According to John R. Hall, Chairman of Humana’s Nominating and Corporate Governance Committee, “As a successful venture capitalist and long-time board Vice-Chair, David Jones brings vigor, strategic insight, and a wealth of experience in healthcare to his new role.”

David is immediate past Chairman of the Greater Louisville Health Enterprises Network, a business consortium designed to promote the growth of the healthcare economy in Louisville and the surrounding region. He also serves on the advisory committee of the Brookings Center on Health Policy, on the board of the National Committee on U.S.-China Relations, and on the Yale President’s Council on International Activities.

In July 2005, Chrysalis Senior Associate Wright Steenrod was promoted to Principal. In this role, Wright will begin to take the lead on behalf of Chrysalis and its investors in sourcing, negotiating, and managing new investments.

“This promotion reflects not only Wright’s stellar work as a Senior Associate, which we believe has helped both our partner companies and the firm create significant value, but also the confidence that the Chrysalis management team has in Wright’s judgment, people skills, and leadership ability,” said David Jones, Jr.

Since joining Chrysalis in June 2001, Wright has focused on investments in the media and communications sector, working with Ygnition, Genscape, and Appriss, among others. He currently serves on the boards of bCatalyst, Inc. and Information Outfitters, and is member of the Entrepreneurship Council at the University of Louisville's College of Business and Public Affairs.

In April 2005, Douglas R. Carlisle, formerly of Naddagote, LLC and Humana Inc., joined Chrysalis as Executive-in-Residence. In this role, Doug will evaluate new business opportunities in the healthcare industry and assist current portfolio companies within this sector.

Doug has over twenty years of leadership experience in the healthcare industry. In 2004, he founded Naddagote, LLC, a private consulting firm offering strategic and tactical support to healthcare organizations. Previously, he was the Senior Vice President responsible for the $3 billion Senior Product segment of Humana Inc., one of the largest Medicare Advantage contractors in the United States and the largest Medicare Advantage contractor in Florida, Chicago, and several other markets.

Doug's broad experience includes market management, network development, financial reporting, and leadership of or involvement in major acquisitions and divestitures. He holds a BS degree from the University of New Haven.

In celebration of our second decade, the Chrysalis logo has recently undergone a "transformation" to better reflect our firm's mission.

Our name refers to the pupa or cocoon stage of a butterfly’s development, or, more generally, to a sheltered stage of being or growth. This marvelous metaphor describes both the young, promising companies with which we work and the support that we provide. Our new logo attempts to capture the three stages of our process:

We identify companies with great potential at a time when few others can imagine what such small, undeveloped “pupae” might become;

We cocoon the companies with nourishment in the form of capital, advice, networking, and recruiting help; and

We help our partner companies determine when to spread their wings as they emerge as thriving businesses, attractive to the public or private markets whose interest funds returns to Chrysalis' investors.

Please visit www.chrysalisventures.com to see our relaunched website, and keep an eye out for the complete rollout of our new logo over the next few months.

In July 2005, Chrysalis led a $4.5 million Series A preferred equity investment in Simi Valley, California-based RAD Electronics, Inc., a provider of electronics manufacturing services. Chrysalis’ co-investor in the financing was Palisade Capital Management, LLC of Fort Lee, New Jersey.

Subsequent to Chrysalis' investment, RAD purchased the assets of Astrex, Inc., a value-added electronic component distributor serving a worldwide customer base. This acquisition followed the company’s acquisition in May of Arrow Electronics’ (NYSE: ARW) Cable Assembly business unit, a supplier of custom cable assemblies and associated contract manufacturing services.

With these back-to-back acquisitions, RAD Electronics has become a formidable player in contract manufacturing services as well as in the distribution of value-added interconnect electronic components. RAD is led by two well-known industry veterans, Chairman William C. Cacciatore and CEO Charles W. Mann, both of whom were senior executives at Richey Electronics, a publicly traded company which was acquired by Arrow Electronics in 1998.

In July 2005, Chrysalis and Ann Arbor-based Arboretum Ventures led a $2 million follow-on investment in Ann Arbor-based HealthMedia, Inc., the market leader in tailored health behavior change programs. Arboretum joined Chrysalis and other existing co-investors in this new round of growth capital.

With this infusion of capital, HealthMedia plans to accelerate the growth rate of its market-leading health promotion, disease management, and compliance programs, and to expand the development, sales, and marketing of its tailored behavioral support programs for the pharmaceutical and medical device markets, the healthcare market (which includes healthcare plans and employers), and organizations focused on disease management. This financing round represents a substantial step-up in the company’s valuation and an excellent validation of its success to date.

Chrysalis Principal Koleman Karleski is member of the company's board of directors.

In June 2005, Detroit-based Asterand, Inc., a tissue banking company, was voted one of the top ten places for scientists to work by The Scientist magazine's survey of its 30,000 readers in 21 countries. This most recent ranking represents the second consecutive year that Asterand has appeared in the list of top ten places to work.

Asterand today is the leading supplier of high quality human tissue and tissue-based services. Its comprehensive approach to human tissue and research services offers drug discovery companies the unique opportunity to have one company meet all of their human biomaterial needs along the continuum of drug discovery. The company currently employs a diverse team of over 60 scientists and support staff, representing over 13 different nationalities and speaking 15 languages.

Chrysalis Managing Director David Jones, Jr. serves on the company's board of directors.

In June 2005, Cincinnati-based Construction Software Technologies, Inc., an emerging construction industry leader in providing online tools designed to streamline bidding processes and eliminate inefficiencies, was awarded the Ernst & Young Entrepreneur Of The Year® award for Technology for the Southern Ohio and Kentucky region. Sponsored by Ernst & Young, the Entrepreneur Of The Year awards program honors entrepreneurs through regional, national, and global award programs in over 125 cities and 40 countries.

In October 2004, the company was also named to the Inc. 500 list of the fastest-growing private companies in America with a four-year annual sales growth of 496%. The company ranked #50 on the 2004 list and #1 in the construction industry category.

In May 2005, Chrysalis participated in a $13 million Series D equity financing of Seattle-based Ygnition Networks, a leading provider of broadband services to the multi-family real estate industry. A follow-on investment for Chrysalis, co-investors included Advanced Equities of Chicago and existing investor ComVentures of Palo Alto.

Ygnition plans to use this funding for several strategic acquisitions already under letter of intent. Over the past four years, the company has purchased the network assets of numerous distressed service providers and integrated those assets into one network that is capable of delivering a full suite of communication services to consumers living in multi-family communities throughout its operating footprint.

In 2000 and 2001, billions of dollars invested in media and communications companies were lost. Digital media investments were the first to collapse as business plans built on “attracting eyeballs” died when investors realized that neither subscribers nor advertisers valued a website’s content enough to pay for it.

Telecommunications companies lasted a year longer. Investors still believed that telecom businesses which sold “shovels to the miners” in the Internet gold rush would work. Investors also believed that the telecom winners would be the companies that built the most reliable networks touching the most potential customers. Unfortunately, investors in almost every new telecom play at that time discovered that the technology in which they had invested often did not work reliably. Investors also discovered that the companies with networks touching the most potential customers were the established telecom companies like Comcast and Verizon – and that these “dinosaurs” who “didn’t get it” could catch up fast. Unreliable products, weak business models, and intense competition from both new and old competitors doomed many new entrants.

From the ruins of the Internet collapse, we are witnessing young companies emerge led by teams who have learned from the recent past. Unlike predecessor businesses, where hype frequently outran capabilities, today’s managers take advantage of genuine technological innovations which are catching up with the promise envisioned during the Internet boom. Underlying the creation and growth of new media and communications businesses is the continued penetration of high bandwidth IP-based networks to our homes, businesses, and personal communications devices. Ubiquitous bandwidth coupled with ubiquitous market demand for content is creating true opportunity today (where faith and hope prevailed five years ago).

In the realm of media, the growing penetration of high bandwidth Internet access creates opportunities to invest in defensible, subscription-based digital media businesses. As a result of the Internet and other communications technology advances, media businesses can now create or aggregate richer information services, of more value to customers than before. Potential customers, both business and consumer, can now be targeted and serviced at far lower cost than in the past. Since 2001, digital media companies with valuable content have proven that revenue models can be built with subscriptions, just like traditional print media businesses (e.g. match.com, Audible.com, VentureWire, etc.).

At Chrysalis, we are particularly attracted to businesses which aggregate and sell proprietary information to distinct customer segments over the Internet for an annual subscription fee.

For example:

Genscape, Inc. - Genscape provides information to energy traders about how much power individual power plants are producing. The energy traders use this information to take positions in the spot power market. The company uses wireless communications networks to capture power plant information via monitors equipped with its proprietary technology. The company publishes this information on a real time basis via the Internet to energy traders around the world. Before the technological advances of the last decade, Genscape would not have been able to capture information through cheap networks, nor would the company have been able to publish information cost effectively in real time without the Internet. With technology to access and distribute this information, the company built a subscription-based recurring revenue business. The company grew rapidly and achieved a dominant position in its niche both in the US and Europe. (Ultimately, Chrysalis and its co-investors accepted an offer to buy the company in 2003. Genscape continues to prosper under new ownership.)

Construction Software Technologies, Inc. (CST) – CST publishes an electronic forum for publicly-bid construction projects (libraries, schools, highways, etc.) and an electronic bid management solution for privately-funded construction projects (office towers, shopping centers, etc.). Both of these services use IP technology to quickly capture and distribute information that previously required physical distribution of plans and specs. This permits substantially more project information to be cost-effectively made available to contractors and subcontractors in real time. With this information, subcontractors can bid more cost-effectively on more projects where their skills match requirements. General contractors can obtain more bids from subcontractors on bid day, ensuring a more competitive and cost-effective bidding process. The electronic distribution of this content would have been infeasible before the advent of widespread, relatively low-cost broadband. Through the use of technology to enrich information as well as to distribute it, CST has also created an attractive subscription-based recurring revenue business.

Moving on to the realm of communications, four emerging trends are driving a rapid and transformational market evolution:

Lines are blurring across the boundaries which historically divided traditional telecom providers. These developments are creating discontinuity and turmoil in the marketplace, an environment in which substantial opportunity for nimble, emerging companies is fostered. These young companies will likely become attractive future acquisition targets for the large incumbent players.

Chrysalis seeks to invest selectively in emerging companies positioned to take advantage of the intersection of these evolving trends. We are focused on investments which require relatively modest amounts of capital to become profitable. We seek businesses which compete in niche markets defined by service quality rather than cost, scale, or proprietary technology, and which, for these reasons, are underserved by the large telecommunications companies. We are particularly focused on:

Last mile service providers, who offer “current generation” landline or wireless broadband services to niche markets underserved or ignored by the larger telecommunications companies.

An excellent example from our current portfolio is Ygnition Networks, based in Seattle. Ygnition uses current generation technology to provide high-speed Internet, video, and voice services to residents of high-end apartments in partnership with apartment owners (typically large REIT’s). These real estate owners are frequently underserved by large telecommunications companies (Comcast, Verizon, et al.) who have been slow to offer more advanced telecommunications services at a quality level demanded by the ultimate customers, the tenants in the apartments. By tailoring its offering to this niche and partnering with property owners to market the service, Ygnition is able to acquire subscribers efficiently. Ygnition has built a leading position and a reputation for quality and reliability in this underserved niche.

Historically, periods of turmoil, particularly following the collapse of an innovation-driven investment boom, create substantial opportunity to find gold among the ashes as technologies mature and managers learn how to avoid the mistakes of their predecessors. Chrysalis continues to view post-bubble media and communications as an area of opportunity, and continues to identify managers with the vision and skill to take advantage of these neglected areas in the evolving telecommunications environment.

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